I Wouldn’t Speculate on Wal-Mart If I Were You

By Mitchell Clark, B.Comm. Published : September 26, 2005

In the wake of Hurricane Rita, Wal-Mart has closed the doors of some 72 stores — yet another blow for the already beleaguered company in a beleaguered market sector. Just take a look at a stock chart for Wal-Mart Stores, Inc. (NYSE/WMT), and you can clearly see that the stock’s been trending down for the last two years.

This year, 2005, hasn’t been a good year for the company, and the weather has really played a role lately in its fortune. Wal-Mart hasn’t had a stock split since 1999, and the company has a long track record of two-for-one stock splits. Since 1980, it has made eight two-for-one stock splits, but 1999 saw the last, signaling the height of the company’s success. It has been downhill ever since.

Make no mistake, Wal-Mart remains a great company; but there is very little space left for it to expand. It expanded into groceries and it expanded into retail gasoline sales. Both these business are very low margin businesses.

Wal-Mart has reached full maturity and is no longer an attractive investment opportunity.

There are all sorts of large-cap companies struggling in this economy. We’ve talked previously about IBM, General Electric, Merck, and Coca-Cola — world-class companies that just can’t grow quickly any more.

The point of all this is to illustrate how important it is to establish where a company is in its life cycle before you invest. You know that a large-cap, global company like Coca-Cola is going to be a slow grower. This was a company that should have been invested in during the `80s and `90s. At the opposite end of the spectrum is a company like Fuel-Tech N.V. (NASDAQ/FTEK), which we’ve mentioned before. This is a micro-cap company that’s experiencing significant growth, as it perfects its products and experiences sales momentum.

In any equity portfolio, there is a place for large-cap and small- or micro-cap companies. But no matter how large or small a company might be, always consider where the company is in its life cycle before you invest a dime.

Wal-Mart is a great company, but I wouldn’t speculate on it if I were you.